Noncompete News: Virginia Supreme Court Overturns Long-Standing Precedent on the Enforceability of Noncompetition Covenants in Employment Agreements

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The Virginia Supreme Court recently struck down a noncompetition covenant contained in an employment agreement, overruling a 22-year-old precedent. Despite reasonable geographical and durational restrictions, the Court held that the noncompetition covenant was unenforceable because the scope of the former employee's restricted activities was overbroad. In Home Paramount Pest Control Companies, Inc. v. Shaffer, 718 S.E.2d 762 (Va. 2011), a pest control company included a noncompetition covenant within the employment agreement that prohibited the company's former employee from "engag[ing] indirectly or concern[ing] himself …in any manner whatsoever [in pest control]…as an owner, agent, servant, representative, or employee, and/or as an officer, director, or stockholder of any corporation, or in any manner whatsoever." This language was identical to the language contained in a noncompetition covenant upheld by the Virginia Supreme Court twenty-two years before in Paramount Termite Control Co., Inc. v. Rector, 380 S.E.2d 922 (Va. 1989).

In overruling Paramount Termite, the Court reviewed its noncompetition decisions over the intervening twenty-two years and concluded that Virginia had gradually refined its views on the reasonableness of such covenants. Applying its current standards, the Court found that the shear overbreadth of the scope of the future restricted activities (the "functional element") – prohibiting the former employee from being even a passive stockholder in a competitor company – was unreasonable, and thus not necessary to protect the company's legitimate business interests. The upshot of Home Paramount is that an overbroad "functional element" - standing alone - is sufficient to void an otherwise reasonable noncompetition covenant.

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